NBER Working Paper No. 9996Issued in September 2003NBER Program(s): HE

Over the last two decades, employers have increasingly offered workers a choice of health plans. The availability of choice has the potentially beneficial effects of lowering the cost and increasing the quality of health care through greater competition among health plans for enrollees as well as allowing consumers to enroll in the type of coverage that most closely matches their preferences. On the other hand, concerns about the potential for adverse selection within employment-based purchasing in response to the availability of choice exist. In this paper, I examine the effects of offering choice in employment-based purchasing groups on access to and the cost of employer-sponsored coverage. I find that greater availability of choice was associated with a reduction in the premium of employer-sponsored coverage and an increase in the proportion of workers covered by the plans offered by employers. However, most of the premium reductions were due to a shift from family to single coverage within employment-based purchasing groups and a reduction in the generosity of the plans in which employees were enrolled. The results are not consistent with the availability of choice leading to lower premiums through greater competition among plans for workers.